The Impact of Fed Cycles on the Stock Market: A Historical Analysis
As investors, we often make assumptions about how the stock market may behave based on certain events or factors. One such factor is the Federal Reserve’s monetary policy and interest rate changes. It’s commonly believed that when the Fed cuts interest rates, the stock market will go up. However, a historical analysis conducted by 3Fourteen Research suggests that this may not always be the case.
According to the analysis, when the Fed begins cutting interest rates, the stock market actually tends to fall. This perplexes novice investors who expect the opposite result. The reason behind this phenomenon is that the market is forward-looking and tends to anticipate future events. In other words, the stock market adjusts its prices based on expectations rather than reacting immediately to interest rate changes.
The analysis charts past Fed cycles and provides a composite outcome of how these cycles have historically impacted the market. It reveals that currently, interest rates have risen from under half a percent to 5.5%. We are now in October/November, and the projection suggests that the Fed will pause until around March. However, it’s important to note that this projection is not set in stone and may or may not happen.
By March 2024, the analysis suggests that interest rates will start to come down. However, it is uncertain whether they will return to their initial levels. Around three months after the rates begin to decrease and approximately ten months after the Fed has paused, the market is expected to enter a recession. During this period, the market falls as talks of a recession increase. The analysis predicts that the market may bottom out in October/November 2024, almost a year from now, while earnings are projected to bottom out around February/March.
It’s crucial to highlight that the research focuses on interest rates rather than predicting how much the market will fall during this period. The main objective is to demonstrate that when the Fed rates start to decrease, markets tend to decline. Market bottoms may occur even before earnings reach their lowest point. This is because the market is forward-looking and often reflects expectations that are six months ahead of actual events.
While the research primarily discusses the US market, it implies that similar patterns may occur in other markets, including India. If the US market follows this projected trajectory, it is likely that the Indian market may not continue rising in the face of such headwinds in the coming year. Although the specifics of how the Indian market will perform compared to the US market are not addressed in this analysis, it is suggested that India, being an emerging economy, may experience a slight decline or stagnation rather than a significant rise.
Looking ahead to 2024, it is crucial to recognize the potential impact of global ramifications and the election year in India. The year is anticipated to be extremely important and significant for the Indian markets. It provides investors with valuable insights for their discretionary investing strategies, market timing considerations, and potential opportunities to invest during market dips.
It is important to note that this analysis is not a complete prediction of how the market will actually unfold. Instead, it offers a historical perspective and an understanding of how the market has behaved in past Fed cycles. The future can always bring unexpected events and factors that may influence market behaviour differently than anticipated. Therefore, it is essential for investors to approach these projections with critical thinking and consider other indicators and analyses before making investment decisions.
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